FAILURE TO SCHEDULE RENTAL INCOME MAY BE BAD FAITH IN BANKRUPTCY PART 1

Section 707 of the bankruptcy code provides for the court’s authority to dismiss a bankruptcy case for abuse. What kind of conduct amounts to abuse of bankruptcy law by the debtor depends on the totality of circumstances surrounding the case. For instance, if the debtor files a bankruptcy despite the fact that his means test shows that he has substantial disposable income; the US Trustee will file a motion to dismiss the case for abuse, unless the debtor converts his Chapter 7 case to Chapter 13, and uses his disposable income to pay his creditors through a Chapter 13 plan. But what if the debtor claims mortgage payments for rental property but does not schedule rental income? This kind of situation may be construed as abuse of bankruptcy law because debtor is deducting an expense but is hiding income. Indeed, this could be seen as bad faith on the part of debtor any may trigger a 707 motion to dismiss.

In Re Bianco, the debtor’s Schedule I income schedule said she received $850 per month in unemployment compensation while her husband, who did not file for bankruptcy, earned $8,649.33 per month in gross wages. After payroll deductions, the couple had monthly income of $7,187.96. According to Schedule J expense schedule, the debtor and her husband had monthly expenses of $8,030, which included $3,580.85 for mortgage payments on two rental properties owned by debtor’s husband. While Schedule J included payments on the rental property mortgages, Schedule I did not include income from the rental properties. Is debtor trying to pull a fast one here? I mean, why hide the rental income if there is rental income? Without declaring the rental income but deducting the mortgage of $3,580.85 for the rental properties, the means test would show zero disposable income, and make debtor eligible for Chapter 7. This can only be a really retarded decision on the part of debtor unless there really is no rental income.